Predictability in Stock Returns: Momentum Effect and Trading Volume in Finnish Stock Market

Abstract

The purpose of this thesis is to investigate momentum effect in Finnish stock market. Earlier evidence also suggests that trading volume has an effect on the magnitude of the phenomenon. The data consists of all the stocks from Helsinki Stock Exchange from 1994–2003. Momentum effect will be studied using the portfolio method used by Jegadeesh and Titman (1993). The stocks will be divided into three portfolios according to their past return performance. Portfolios’ holding period returns will be studied using buy-and-hold strategy. The main hypotheses in this study are that momentum effect exists in Finnish stock market, and that the effect is stronger among stocks with high trading volume. Trading volumes effect on profitability of momentum strategies will be studied by constructing momentum portfolios sorted by trading volume, with average daily turnover used as a proxy. Using regression analysis by adjusting returns for market risk and size factor, it is studied can the asset pricing models explain the possible abnormal returns. Post-holding period returns are investigated to learn about the source of the possible momentum effect. Results show evidence of momentum effect in Finnish stock market, and the trading volume accentuates momentum returns. It is seen that the abnormal returns come almost exclusively from the loser side of the momentum strategy. The returns of winner stocks disappear after risk adjustment. There is clear evidence of continuation in high trading volume loser stocks, but considering the short selling constraints in Finnish market, the profits from momentum strategies are largely unavailable for regular investors.